03 March 2006

Kyoto will fail because it's central planning

'[Tim Flannery] mercilessly dissects the alternatives [to Kyoto] —particularly the idea of replacing hydrocarbon fuels with hydrogen, which he regards as expensive and probably technically unfeasible. And he dismisses the hydrogen-economists' idea of “sequestering” the carbon dioxide generated underground or in the oceans as both impractical and environmentally catastrophic. The answer, according to Mr Flannery, lies in revamping the way electricity is generated. That means abandoning coal, the most carbon-intensive fuel around, and employing sunlight, wind, geothermal power (which he believes is an under-appreciated resource) and also nuclear power. Having done that, the problem of dealing with petroleum-consuming transport becomes one of storing electrical energy in a sufficiently dense form that vehicles can use it. Here, he thinks, hybrid petrol/electric cars point the way forward.'

That's a good summary of the alternatives currently on offer and for what it's worth I agree with most of it. The problem is that it's one man's view and one man, however well-informed, cannot possibly investigate every alternative to Kyoto, nor anticipate future technology, nor take into account our rapidly expanding knowledge of the causes and consequences of climate change, nor the ever-changing economics of climate change, its prevention and mitigation. As a statement of where we are it's fine. As a prognosis for the future it's as dangerous as Kyoto, and that's as dangerous as the central planning that brought the Soviet Union to its knees.

Policymakers need a certain humility. Climate change is a potential catastrophe, and policymakers can help us deal with it. But they are as poorly placed to tell us how to deal with it as the Soviet or Chinese central planners were when they thought they knew best how to stimulate economic growth. Kyoto assumes that it knows what's causing climate change - anthropogenic greenhouse gas emissions - and on this it may well be right. But it's short-sighted to then assume that the only feasible way of dealing with the problem is to cut these emissions. If Mr Flannery's alternatives were prescriptive they would be similarly misguided. The best cost solution will be an array of diverse, adaptive approaches, which cannot be pre-judged by any single person or institution, however well-funded.

A Climate Stability Bond regime would not prejudge the most likely solutions to the climate change problem; it would not even prejudge the size of the problem. Instead it would allow the market to judge the scale of the problem and to allocate resources to most efficiently achieve whichever climate stability target policymakers agree we should aim for. The anti-market approach led to the environmental disasters of the Soviet Union. And the anti-market approach, in the shape of perverse subsidies to energy, agriculture, water and transport is also responsible for a great deal of today's global environmental degradation. Markets are not perfect, but their inventiveness and efficiencies can be channelled into the public good. Climate Stability Bonds would create incentives to solve what is probably our most urgent environmental problem. Kyoto will fail because it's central planning, which stifles efficiency, imagination and inventiveness.

3 comments:

I've probably said it before, but I think the idea needs testing out in practice before you apply it to critical issues.

And also, reducing greenhouse gas emissions is so obviously necessary that if it didn't become a part of the solution in a social bonds regime, I would consider it proof that the idea is flawed.

I can put it like this: I am strongly convinced that reducing greenhouse gases is necessary, I am not so strongly convinced that social policy bonds would work.

A problem, which I may have also pointed out before, is that to make climate stability bonds a viable solution, there has to be a lot of them, enough to make them preferable to business as usual. That is a problem, because there's no doubt that business as usual will be extremely profitable (for some) in the short run. And I have to ask: offering industry a part of the climate bonds payoff in order to keep them from polluting - is that not like bribery? Shouldn't such antisocial behaviour be regulated by laws, and not paid off?

I think the idea needs testing out in practice before you apply it to critical issues.

I agree absolutely. It would be best to try it out at first on small self-contained issues, such as the water quality of a river or lake, or crime rates in a particular city. The idea needs discussion, application then refinement before it can be deployed to solve global problems.

reducing greenhouse gas emissions is so obviously necessary

I certainly agree emissions should be reduced, but not necessarily because that is the best way of tackling climate change. I'd say they should be reduced because their social and environmental costs (including any effect they have on the climate) are not internalised: in other words, these emissions impose social and environmental costs not borne by the polluters.

If we are talking about just the effects of emissions on climate I'd not be so dogmatic. Rather than reduce emissions it might be cheaper to remove the gases from the atmosphere, for instance, or of course there are many other possible solutions to climate change, which will not at all be encouraged by the top-down Kyoto approach.

And has there been robust analysis showing that the benefits to the climate of reducing emissions will outweigh the costs? Remember that many - perhaps most - of these costs will fall on those least able to adapt: most likely large proportions of the population in developing countries.

to make climate stability bonds a viable solution, there has to be a lot of them, enough to make them preferable to business as usual

Sure, or to be a bit more accurate, the total redemption value of the bonds would have to be significant. Note though (1) that the bonds could complement existing efforts and (2) the funds could be supplemented by contributions from government or anybody else throughout their lifetime. In my book (forthcoming), I go into more length about the extremely valuable information generated by bond prices, and changes in bond prices, which would help the bonds' backers decide whether to issue more bonds after the initial float. (Let me know Harald, or indeed anybody reading this, if you'd like me to email you my text on this - it's a few pages in MS Word.)

offering industry a part of the climate bonds payoff in order to keep them from polluting - is that not like bribery? Shouldn't such antisocial behaviour be regulated by laws, and not paid off?

It's not black or white that factories that emit pollutants are engaging in antisocial behaviour. They might be generating many positive as well as negative externalities. If their pollution is illegal then I agree they should be tackled by the law. But what about behaviour that is not illegal, and that is partly antisocial and partly pro-social, like a typical factory in a non-corrupt part of the world? Bondholders would have powerful financial incentives to seek out those factories that pollute most and (1) see whether they are in fact complying with the law and if they're not report them to the authorities, and (2) if they are operating legally, offer a subsidy (bribe) to install cleaning equipment, or to reduce its output, or close down completely.

Note that bondholders will also have incentives to lobby for more stringent laws, and to monitor all factories etc for their compliance with the laws. Note also that this sort of bribery already goes on: owners of dirty cars are often rewarded for trading up.

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Social Policy Bonds

See the Social Policy Bonds website for overviews and links to articles, papers, news and more about Social Policy Bonds. Click on the image below to download a 2400-word article, published by the Institute of Economic Affairs, London.

Social Policy Bonds in 2400 words

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Social Policy Bonds in the media

9 October 2015: An article by Greg Bearup on the genesis of the Social Policy Bond idea, and application of a version of it in Australia appears in the Weekend Australian Magazine. (The article can also be downloaded as a pdf from here.)

October 2013: Professor Robert Shiller of Yale University, is named as one of the three winners of the 2013 Nobel Prize in Economics. His Nobel Prize lecture (pdf) delivered on 8 December, mentions Social Policy Bonds. Professor Shiller has for many years encouraged my work on Social Policy Bonds, beginning in late 1996 when he sent me this letter.

3 May 2012: An audio talk by Nobel Prize winner Professor Robert Shiller at the London School of Economics, in which Social Policy Bonds are briefly mentioned, is available here.